worldlyinvestor.com Sector of the Day
Hasbro Now Has It
By Glenn S. Curtis, Columnist
Curtis says that Hasbro is more than just toying with a turnaround.
Toy maker Hasbro (NYSE:HAS - news) has had a rough go of things in the last 12 months.
The negativity started in the second half of 1999 when most Hasbro investors jumped ship as the company announced it would take a $141.6 million pre-tax charge to cover costs from a reorganization.
This was followed by a slew of bad news emanating from competitor, Mattel (NYSE:MAT - news), and a general lack of interest in toy companies among investors. The chain of negativity caused this fallen angel to drop more than 40% from its yearly high. And, while some investors are still sitting on the sidelines, I think now is the time to buy the stock.
Leaner
and
Meaner
After
taking
the
fourth-quarter
charge
that
included
cutting
2,200
jobs
or
19%
of
its
work
force,
closing
two
plants
and
shifting
much
of
its
manufacturing
to
Asia,
Hasbro
is
a
leaner
and
meaner
organization.
Total
savings
from
these
efforts
should
come
to
$16
million
in
2000
and
$23
million
or
more
in
2001.
In
the
first
quarter
ended
April
2,
2000,
Hasbro's
earnings
were
up
14.2%
on
revenue
of
$773.5
million.
The company's Pokemon toys and games as well as the Furby product line were the key drivers of growth. In addition, the company continues to generate substantial revenue from its other name brands that a few of us as kids grew up with, including Tonka, Playskool, Parker Brothers, Milton Bradley and Galoob.
Hasbro's diverse product line and proven ability to bring quality games to market is reason enough to think that the stock is a bargain in the mid teens. But another big boost could come in the form of the planned launch of an Internet game site, Games.com. The site is expected to go live sometime in the fall.
Most analysts believe that the launch could prove to be a big catalyst for the stock. Some have suggested that it could add as much as $5 a share to the current stock price, although I would point out that there are few if any revenue projections for the site (although some have speculated that $15 to $20 million in first-year revenue is doable).
I would suggest that news surrounding the site's number of unique visitors, ``stickiness'' and total page views could help provide some lift to the share price. While it's premature, talk of an IPO could provide even a bigger lift down the line.
Solid
Institutional
Holdings
As
of
the
end
of
the
first
quarter
institutional
ownership
was
a
very
healthy
76%
of
the
outstanding
shares.
However,
most
retail
analysts
have
been
fairly
shy
in
their
recommendation
of
the
stock
(although
most
are
bullish
on
the
long
term
prospects).
I
think
that
when
the
sell
side
analysts
finally
get
behind
Hasbro
in
force,
that
it
will
prove
to
be
a
big
factor
in
moving
the
stock
to
the
next
level.
Further,
even
the
slightest
increase
in
interest
among
institutions
could
soak
up
the
existing
supply
of
stock
in
the
market,
forcing
the
price
to
move
up.
Another plus is that the under the current stock buyback program the company has repurchased more than 37 million shares. This will help to reduce the total share count and provide a boost in earnings per share. There is roughly $200 million still allotted for repurchasing stock from time to time in the open market. With Hasbro expected to report just shy of $400 million in free cash flow (approximately $2.20 per share) in 2000 additional funds could be allocated for share buybacks or to make acquisitions.
In addition to the above-mentioned items the company should also benefit from a host of new products including: Harry Potter trading cards, the interactive Poo-Chi - a robotic canine that fits in the palm of your hand, and the interactive Yoda (from Star Wars).
These products, coupled with existing games and toys (such as Pokemon and Furby) are expected to provide a boost, perhaps in the range of 6% to 9% to the company's top line in 2000 and 2001. Accordingly, revenue estimates of $4.5 billion in 2000 and $4.8 billion in 2001 look very doable given the product pipeline.
By
the
Numbers
Consensus
estimates
have
Hasbro
earning
$1.41
per
share
in
2000
and
$1.64
per
share
in
2001.
At
just
0.6
times
sales,
roughly
5
times
EBITDA
(Earnings
Before
Interest,
Taxes,
Depreciation,
and
Amortization),
the
stock
certainly
appears
to
be
a
bargain.
Further, at 10.5 times 2001 estimates, the stock is trading at sizeable discount to its expected earnings growth rate of 16.3%, confirming in my mind that it's a steal. The stock's worth $25 if the company meets Street estimates and north of $30 if the negative sentiment regarding toy and consumer products stocks in general begin to turn.
Glenn Curtis is an analyst for worldlyinvestor.com. Prior to working at worldlyinvestor.com, he was an analyst at InsiderTrader.com, a financial Web site, and at Cantone Research, a brokerage firm in New Jersey. Curtis is series 6, 7, 24, and 63 licensed. He does not hold a position in any of the stocks mentioned in this column. Positions may change at any time.
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